Nike Inc Assignment help.
LEARNING OUTCOMES.
- Use financial statements and accounting data to make management-level decisions.
- Evaluate short- and long-term business projects based on relevant financial information and projections.
- Asses a firm’s financial performance using financial ratios and other relevant formulas.
- Calculate the value and cost of assets,profits and debts.
- Describe financial aspects that affect global trade and international organizations.
Solution.
Nike Inc.
Introduction
Nike is a global footwear manufacturer and a market leader, incorporated in 1968 under the laws of the state of Oregon. At the time of its incorporation, Nike was chiefly involved in the manufacture of sports footwear. Nike, however, has over the years expanded its operation and business and according to its annual report, Nikes principal business is “the design, development, and worldwide marketing and selling of athletic footwear, apparel, equipment, accessories, and services” (Nike Inc., 2014). From this business description, Nike clearly engages in a wide scope of activities. This is probably one of the factors that have contributed to its position as the world’s largest of athletic footwear and apparel manufacturer (Nike Inc., 2014). Perhaps another factor that has contributed to this status is its adoption of technology-based innovation. Nike indicates that one of the channels through which it sells its products is its websites, a marketing venture it refers to as Direct to Consumer (DTC) operations. Indeed, Nike has carved out a niche for itself as the brand to watch in the sports world. Nike’s annual report is now analyzed to understand how and why Nike has managed to attain this achievement.
Nike has a wide revenue base. While it is headquartered in the United States, its operations are global, and the company has activities. It offers a wide range of products from which it develops its product mix. According to its annual report, there are eight key categories of Nike’s product offerings. These are running, basketball, football (Soccer), women’s training, men’s training, sportswear, action sports and golf (Nike Inc., 2014). Nike sells its products in a number of markets and geographical segments. It reports the following operating segments: North America, Western Europe, Central and Eastern Europe, Japan, Greater China and Emerging Markets.
Nike carries out its operations under a number of different brand names. There is the NIKE Brand name, under which the company sells a line of performance equipment including socks, sport balls, bags, eyewear, digital devices and bats. Then, there are other brand names which are operated as wholly owned subsidiaries. Under Nike IHM, the company sells a variety of plastic products. Hurley, another wholly-owned subsidiary brand engages in the design and distribution of youth and sports lifestyle apparel (Nike, 2014). Nike also operates the Brand Jordan, which predominantly focuses on Basketball footwear, apparel and accessories. Moreover, Converse operations, whose results are reported independently, are another of Nike’s segments. Converse is involved in the design, distribution and license of casual sneakers and apparel under a number of trademarks such as Converse, All-star, Star Chevron, One Star amongst others.
From the above analysis, it is evident that Nike engages in
a vast variety of business activities. This is what makes Nike an industry
leader in the sporting world. In the rankings for the World’s most valuable
sports brand in the year 2013, Nike emerged as the top brand, with a brand
value of $17.3 billion (Forbes, 2013). This marked retention of the position
on Nike’s part. Nike managed to beat other apparel manufacturers such as Adidas
(no. 3), and under Armour (no. 5). To retain this position, Nike also beat
other brands such as ESPN, arguably the world’s largest sports channel, which
came in second, with a brand value of $15.0 billion (Forbes, 2013). This performance is an
indication of the profitability of Nike, which has also been named the most
innovative company in 2013 by Fast Company magazine.
Financial Stability Analysis
Financial data is an important element for any entity, which provides essential information about the strength and efficacy of the company’s operations. Financial data is an outcome of the accounting process and is presented in the form of financial statements. Organizational stakeholders, including investors, rely on this data as an analysis tool to make decisions and to assess the firm’s plans and performance (Deari, 2010; Healy & Palepu, 2012 ). Much of this information can be obtained from a company’s annual report that is usually provided to investors. Aspects of Nike’s financial information are discussed in the ensuing sections. The financial data is evaluated, analyzed and interpreted
Nike classifies its sales revenues into local and international categories. For the 2014 fiscal year, Nike and Converse sales in the US contributed to 46% of total revenues. 26 % of these sales came from Nike’s three largest customers (Nike Inc., 2014). In retrospect, sales from the international category accounted for 54% of Nike’s total revenues. In this category, its three largest customers accounted for a total of 6% of its international revenues. These metrics are particularly useful when it comes to a scan of the external environment using tools such as Porter’s five forces, one of which is buyers purchasing power. Nonetheless, the focus of this project is on financial data and Nike’s financial outlook.
One of the financial indicators is operating income, which is the profit an enterprise realizes after deducting operating expenses. It is also referred to as the earnings before interest and tax (EBIT). The operating income is calculated as the difference between gross income and operating expenses as well as depreciation and amortization. Alternatively, the operating income may be obtained by adding interest and tax to the net income. Other aspects of income that provide valuable insight into a company include the income before taxes and net income. Income before tax is basically the operating income less the interest expense, while net income goes a step further to deduct tax. Each of these figures are obtained through a successive deduction in the preceding order. Nike provides each of these figures in its annual report, and these are the figures used herein. For Nike, its gross income was $12,446 million, while its operating expenses, including administrative expenses were $8766 million. Consequently, its operating income was 12446 – 8766, which is $3680 million. The income before taxes for Nike was $3544 million while the net income, evaluated after deductions of discontinued operations was $2693 million. Earnings per share (EPS) indicates the amount of profit allocated to each common share of a company. Nikes EPS for 2014 stood at $3.05 for basic earnings and $2.97 for diluted shares. The other significant component of income allocation and distribution is retained earnings. Retained earnings refer to the portion of profit generated which is not paid out as dividends but instead, retained for reinvestment into the company’s core business. It is calculated as follows: retained earnings = starting retained earnings + net income – dividends. Nike’s retained earnings for 2014 were 4,871.
The sales growth rate is an indicator of the rate at which sales of a company are growing. It is a comparative tool that compares the financial results of a company over the years. It is obtained as the quotient of a given year’s sales, divided through the previous year’s sales, multiplied by 100. The tax rate, on the other hand, represents the rate of taxation applicable to a company. This figure is rather straightforward and does not require calculation. Finally, the dividends payout ratio is a comparative figure that evaluates the dividends paid out to stockholders against the company’s net income. It is the quotient of the former divided by the latter. Nike’s sales growth rate was evaluated using the figures for revenues. The table below presents a summary of Nike’s sales growth rate over the last five years. The effective income tax rate is also provided in the same table
| Year | 2014 | 2013 | 2012 | 2011 |
| Sales growth rate | 9.82 % | 4.91 % | 15.66 % | 9.72 % |
| Income tax rate | 24.0% | 24.7% | 25.0% |
The final item is the dividends payout ratio. Again, this ratio is obtained by dividing the dividends paid out with the net income. Thus, for 2014, for instance, this ratio was 799/2693, which equals 0.30. for 2013, this ratio was 0.29 while for 2012, the ratio was 0.27.
Further information about Nike’s financial status can be obtained from analysis through financial ratios. Liquidity analysis provides an indication as to whether a company is capable of meeting its short-term debt obligations, and is performed through liquidity ratios. The most common ratio is the current ratio (current ratio = current assets / current liabilities). It indicates the ability of the company’s assets to pay off current liabilities. A higher ratio is desirable. Nike’s current ratio is 2.7 (Nike Inc., 2014). A closely related analysis tool is solvency analysis. Solvency analysis provides an indication of the ability of the firm to attend to its long-term debt obligations. It is determined through solvency ratios, including debt to equity and debt to assets. The debt to equity ratio is derived as the quotient of total debt divided by total equity (Debt to equity = Total debt / Total equity). Unlike the current ratio, here, a lower figure is desired. Nike’s debt to equity ratio for 2014 is 1199/10824 = 0.11. This ratio is very low and thus presents a favorable position of Nike.
Capital utilization and profitability ratios are another set of ratios that provide valuable insight into Nike. The return on equity indicates the portion of the net income that is earned on shareholder’s equity. It indicates what portion of the profit a company generates from the money invested by shareholders, and is obtained as the quotient of net income divided by shareholder’s equity. Nike’s ROE for 2014 was 24.6% (Nike Inc., 2014). The return on assets indicates the profit a company generates for every dollar of assets invested (Healy & Palepu, 2012 ). It is a product of the return on sales (net profit margin) and the asset turnover. In its most basic expression, the return on assets is a quotient of the net income divided by assets. Nike’s ROA for 2014 stood at 14.9% a decrease from the previous year. Another ratio is the price/earnings (P/E) ratio, which indicates the amount investors are willing to pay for every dollar of reported profits. Nike’s P/E ratio for 2014 was 25.9. Based on the financial analysis, Nike is a good investment option. It has very favorable figures on all financial ratios.
